Operational risks - Figures in m

Operational risks particularly include risks related to the availability and cost development of energy, raw materials, and qualified personnel. In this category we also take into account regulatory risks associated with environmental constraints, as well as production, quality, and IT risks. Operational risks have diminished significantly in comparison with the previous year due to, among others, the reduced risk assessment regarding the development of energy costs and the commissioning of new capacities in Kazakhstan.

Volatility of energy and raw material prices

For an energy-intensive company such as HeidelbergCement, price trends in energy markets, which are extremely volatile, represent a considerable risk. In 2013, energy prices remained stable or decreased slightly. This development was favoured by an increase in the production of shale gas and oil in North America. However, in some countries, such as India, energy prices rose considerably.

Production bottlenecks, such as those owing to conflicts in the Middle East, could lead to a major increase in energy prices. In a few countries, risks also arise from cutbacks in state subsidies for electricity or from the state regulation of oil and gas prices. In Indonesia, a reduction in fuel subsidies for trucks is currently under discussion. If this reduction is introduced, it will raise the transportation costs of our raw materials and finished products. As a countermeasure, we are planning a corresponding increase in sales prices to offset the rising costs. We consider this a medium risk.

In addition to the rise in energy prices, infrastructural bottlenecks also pose a common risk for our Group with regard to electricity supply, especially in Africa. The prices of other raw materials are also subject to economic fluctuations. In 2013, prices for our key raw materials remained essentially stable, but developed very differently in the various regions.

We minimise the price risks for energy and raw materials by Group-wide, structured procurement processes. Furthermore, we rely on the increasing use of alternative fuels and raw materials. In

this way, we minimise price risks while reducing CO2 emissions and the proportion of energy-in-

cement manufacturing process with the Group-wide “Operational Excellence” programme, which was launched in the summer of 2010. By reducing and optimising our consumption of electricity, fuel, and raw materials, we are working directly towards a reduction in energy costs.

The “FOX 2013” programme has enabled us to further increase the Group’s financial and operational performance over the last three years and to achieve savings in purchasing to offset the rising costs of energy and raw materials. More information on our procurement management can be found on page 100.

In the process of setting prices for our products, we aim to pass on increases in the costs of energy and raw materials to our customers. The success of these price increases is subject to considerable uncertainty, as most of our products are standardised bulk goods whose price is essentially determined by supply and demand. As a result, there is a risk that price increases cannot be passed on or will cause a decline in sales volumes, particularly in markets with excess capacities.

Availability of raw materials and additives

HeidelbergCement requires a considerable amount of raw materials for cement and aggregates production, which is ensured by our own high deposits. In order to emphasise the key role of raw materials in our company and facilitate the transfer of knowledge and synergy effects beyond national borders, we have combined our geology activities across the Group at HTC Global (see the Research and technology section on page 44). There is, however, potential for certain risks in particular locations with regard to obtaining mining concessions. In Malaysia, for example, the expansion of urbanisation may prevent a quarry from continuing to operate. Necessary permis- sions may be refused in the short term or disputes may arise regarding mining fees. Ecological factors and environmental regulations for access to raw material deposits also create a degree of uncertainty. In some regions of the world, for example in West Africa south of the Sahara, raw materials for cement production are so scarce that cement or clinker needs to be imported by sea. Rising transportation costs and capacity constraints in the port facilities can lead to an increase in product costs. Overall, we rate this as a low risk.

Availability and prices of the additive blast furnace slag, which is used in cement manufacturing and is a by-product in steel manufacturing, are subject to economic fluctuations and therefore entail a cost risk. Blast furnace slag is used primarily in Europe. In 2014, steel production is ex- pected to remain stable or increase slightly compared with the previous year.

The transfers of production in connection with adjustments of European excess steel capacity may result in a shortage of blast furnace slag quantities in the short to medium term. As a precaution against potential future supply shortages and price fluctuations, we are optimising our stock holding and range of cement types.

Production-related risks

The cement industry is a facility-intensive industry with complex technology for storing and pro- cessing raw materials, additives, and fuels. Because of accident and operating risks, personal injury and material or environmental damage may occur and operations may be interrupted. In order to avoid the potential occurrence of damage and the resulting consequences, we rely on various surveillance and security systems in our plants as well as integrated management systems, which guarantee high safety standards, and regular checks, maintenance, and servicing. To identify the threat of potential dangers, we aim to provide all employees with appropriate training to raise their risk awareness. Overall, we consider the production-related risks as low risks.

Combined management r

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Additional information

As demand for building materials is heavily dependent on weather conditions, there is a risk that capacity utilisation may fluctuate and production downtimes may occur. We minimise this risk by establishing different regional locations, making use of demand-oriented production control and flexible working time models. In addition, we make use of production downtimes, where possible, to carry out any necessary maintenance work.

HeidelbergCement’s risk transfer strategy sets deductibles for the main insurance programmes that have been adjusted to the size of the Group and are based on many years of failure analyses. As of 2011, the international liability insurance programme has optimised the cover and liability limits, particularly for risks resulting from environmental damage.

Quality risks

Building materials are subject to a strict standardisation. If supplied products do not meet the prescribed standards or the customer’s quality requirements, we risk losing sales volumes, facing claims for damages, and/or damaging our customer relationships. HeidelbergCement ensures compliance with the standards at the Group’s own laboratories by means of fine-meshed quality assurance in parallel with every process step as well as final inspections. Quality assurance controls are also carried out by independent experts as part of the extensive quality assurance programmes already in place. We consider the quality risks as a low risk.

Regulatory risks in environmental protection

Changes to the regulatory environment can affect the business activities of HeidelbergCement. This concerns mainly legal regulations for environmental protection. Tighter environmental regulations could lead to increasing costs, higher demand for investments, or even the closing of production sites.

As part of the European climate package adopted in December 2008, which concerns the reduction of greenhouse gas emissions, ambitious goals have been set by the European Parliament and the

European Commission with regard to climate protection. The cement industry, like other CO2-

intensive industry sectors, has not been affected by the full auction of emission rights since 2013. The emission rights will thus continue to be allocated free of charge, but by 2020 their quantity will have been reduced by 21 % compared with 2005. The emission certificates are to be allocated on the basis of demanding, product-specific benchmarks, and will be further reduced by the annually growing cross-sectoral correction factor. A rise in climate protection cost may be assumed as the total volume of certificates continues to decrease. In the long term, this could create additional burdens in Europe as a result of higher manufacturing costs and therefore clear competitive disadvantages in comparison with producers from countries not involved in emissions trading. In the US state of California, emissions trading started with the first auction on 14 November 2012. The new regulation officially came into effect on 1 January 2013. Four auctions took place in the reporting year. Our subsidiary Lehigh Hanson did not take part because the state of California allocated sufficient emission rights free of charge to the cement industry. We do not expect this to change in the short term. However, we will monitor the programme closely to ensure we make a timely decision regarding participation. Any involvement in the cap-and-trade programme entails the risk of having insufficient emission rights in the future and of incurring additional costs from the acquisition of rights.

An emissions trading system was introduced as pilot project in the Chinese province of Guangdong in 2013. In 2014, 97 % of the emission certificates assigned for the year 2013 were allocated free of charge. Guangdong is one of China’s first provinces to introduce the emissions trading system.

It is still in the early stages and will surely continue to develop. The full extent of the impact on our cement plants in the region cannot be conclusively assessed at this point.

The implementation of the European Industrial Emissions Directive 2010/75 into national law in 2013 led to more stringent environmental requirements for the European cement industry. In Ger- many, in particular, the limits for dust and ammonia emissions from 2016 and for nitrogen oxide emissions from 2019 were significantly tightened and even exceed EU requirements. Considerable investment is needed in order for us to meet these more stringent environmental regulations. On 7 February 2013, the American Environmental Protection Agency (EPA) introduced the New Emission Standards for Hazardous Air Pollutants (NESHAP), which also apply to the cement industry. The industry was granted an additional two years before having to adopt the new standards, which will be mandatory from September 2015. Our North American subsidiary Lehigh Hanson has invested in technical equipment in order to meet these new standards, which are more stringent than standards already existing in other parts of the world.

Climate protection and reducing CO2 emissions are a focus of HeidelbergCement’s sustainability

strategy. By increasing energy efficiency, developing cement types with a lower proportion of

clinker, and using alternative fuels, such as biomass, we were able to reduce our specific net CO2

emissions from 1990 to 2013 by 21%. Additional measures concerning climate and environmental protection are outlined in the Environmental responsibility chapter on page 96 f. and the Research and technology section on page 43 f.

IT risks

IT systems support not only our global business processes and our internal and external communication but also to an increasing extent sales and production. Risks could primarily arise from the unavailability of IT systems, the delayed provision of important data, and the loss or manipulation of data.

To minimise these risks, our Group uses back-up procedures as well as standardised IT infra- structures and applications. Furthermore, the critical systems are run at two separate computer centers per region that comply with the latest security standards.

All important server systems and all PCs are constantly protected against potential threats by up-to- date antivirus software. In addition, operating system platforms and critical business applications are regularly updated and secured by additional safeguards.

Information security is an integral part of the Group-wide IT strategy. We prepare, implement, and revise measures to protect data, applications, systems, and networks. One particular focus is access protection as well as the monitoring and filtering of data traffic. The IT security process is structured and divided into a series of guidelines, standards, and recommendations, which help raise our employees’ awareness.

A continuous improvement process ensure amendments and a sustainable increase in the efficiency of security measures. We also take measures to counteract the ageing process of equipment and system technology. In the case of existing applications, we are particularly concerned with business-critical resources (e.g. ERP applications, WAN infrastructure), which are updated or replaced in a consolidation programme.